Carbon Markets "Collapse" in Europe; Ignorant Journalist Frets

Here is the most ignorant reporting you'll ever see on carbon trading schemes (at least until tomorrow, I bet). Julian Glover, chief lead writer at the Guardian, doesn't understand carbon trading, but he's sure worked up about it:

Set up to price pollution out of existence, carbon trading is pricing it back in. Europe's carbon markets are in collapse.

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That there exists something called carbon trading is about all that most people know. A few know, too, that Europe has created carbon exchanges, and traders who buy and sell. Few but the professionals, however, know that this market is now failing in its purpose: to edge up the cost of emitting CO2.

A year ago European governments allocated a limited number of carbon emission permits to their big polluters. Businesses that reduce pollution are allowed to sell spare permits to ones that need more. As demand outstrips this capped supply, and the price of permits rises, an incentive grows to invest in green energy. Why buy costly permits to keep a coal plant running when you can put the cash into clean power instead?

All this only works as the carbon price lifts. As with 1924 Château Lafite or Damian Hirst's diamond skulls, scarcity and speculation create the value. If permits are cheap, and everyone has lots, the green incentive crashes into reverse. As recession slashes output, companies pile up permits they don't need and sell them on. The price falls, and anyone who wants to pollute can afford to do so.

The bolded portion is where he goes right off the rails. The market for emission allowances was not created to increase the cost of emitting carbon dioxide, nor was it ever intended to. All it does is incentivise a desirable activity: getting carbon producers to emit less carbon dioxide than they have allowances for. The reduction in carbon dioxide isn't caused by the market, but rather by the cap on allowances. The market is just used to more efficiently allocate the limited supply of allowances and to do it without an even greater bureaucratic market intrusion.

Glover has all the facts, but he reverses cause and effect when it comes to carbon trading. For example, in the first round of allowances issued under the EU emission trading scheme, many governments gave out more allowances than producers of carbon needed. It was no "cap" and all "trade." As a result, carbon emissions rose. The low, low price of carbon allowances wasn't the "fault" of the carbon market. Nor was the emissions increase caused by low price of carbon allowances. In fact, both were caused by the EU governments' failure to actually cap carbon emissions.

All that was supposed to be rectified in the second round of allowances. Glover points to the high price of carbon allowances as evidence that it was working. But it wasn't working because the price of carbon allowances was high. It was working because the cap had been set more appropriately. As a consequence, the price of carbon allowances rose.

Now, because of the recession, businesses are discovering that they need fewer allowances than they had thought. So more are willing to sell their unused allowances and the price has fallen. But the crucial point is that THE CAP HASN'T CHANGED. Glover frets that now, because prices have fallen, "anyone who wants to pollute can afford to do so." Well, yes, but that shouldn't be cause for alarm at all, because it doesn't matter. It's like this:

Scenario 1: The government gave me two carbon allowances and I was going to use them to produce two widgets of carbon. My brother got zero allowances, so he doesn't produce any widgets. At the end of the day, total carbon widgets produced = 2.

Scenario 2: But now because of the recession, I've realized I don't need two widgets of carbon, I only need one. So I made one widget and I sold one of my carbon allowances to my brother (sucker). And he took it and made his own carbon widget. Total carbon widgets produced = 2.

It's a Christmas miracle! We have more polluters, but the same amount of pollution. This is not a market failure, as Glover writes and as numerous other idiots claim. This is exactly what we expect and want to happen. We have more efficiently allocated carbon allowances than the government did (remember, it gave me two and him none). And we did it without government intervention. Now, I've produced what I wanted and, this part is key, he got to produce what he wanted. Our little economy thrives...and I'm tired of this metaphor, it's time for dinner.